I have to tell you a story. It's about being absolutely right and getting taken out behind the woodshed anyway. I have written about it once before, please forgive the redux.

Several years ago, I suspected that a company called FuelTech symbol FTEK, was nothing more than a sham. They make clean systems for coal fired generators. Their products are expensive and not all that effective, profits were virtually non existent. They had a CEO that could spin dogshit into health food. I listened in on a couple of conference calls. I made a huge decision. I shorted and bought put options to the tune of nearly 25% of my portfolio. At that time, FTEK was trading at 25. When the earnings report came out, a huge miss, I waited for the payoff. The stock went up 40%. There was a decent short position in the stock but nothing that could drive a 40% short covering rise. My margin evaporated. My options appeared worthless- strike price 20. I went home that evening mumbling, "wtf happened." I now had a net position of 35% of my portfolio tied up in this mess. To cover meant certain death.

I evaluated what had happened. Were people nuts? What had changed to improve the outlook for this company? Nothing. I listened to the CEO Rumplestiltshit wax poetic on the conference call again. I did the only thing that made sense. I nearly tripled my short position and bought a series of puts at various strike prices and dates. I was now embedded in this mess nearly three quarters of my portfolio.

I spent a few sleepless nights. Afraid to tell anyone for the certain admonishment I would get. A few weeks later, the gamble paid off. And while I valued that stock then at 5 bucks, it trades for 9 now, I covered and hit all of my strike prices in the teens. I made a whopping 10 or 11k having risked 80k. It barely covered the short term gains tax.

There are two things you must always ask yourself if you have done all of the homework you can and a price moves away from you. 1. Did I do all of the due diligence that I could, in other words- did I miss something very material? 2. Has anything fundamentally changed? If you can answer those two questions with an honest "no" then adding to your position makes a lot of sense. It is called conviction.

With respect to gold's recent decline, about 7%, the markets are moving away. I expect this. I also expect gold to move lower, perhaps sub 1100. This is very natural as people take profits. I am not going to focus on commodity manipulation, paper markets here. People always think they can catch the top and they will ride an investment as long as it runs with them. When it begins to run away, they cut and run. Sometimes, they have a shorter horizon. Mostly, lol, they are just chicken shits.

Ask yourself those two questions. Have I made a research error? Has anything fundamentally changed? The answers are currently no and no. However, I want to give the exception here. If deflation (a longshot) wins this war with inflation (heavy favorite) I might change my mind. This picture will become much more crystalline in the next 6 months. Chinese workers are making chump change and spending it all on food. Do not think for a second our economies are independent of one another. Their pain will become ours. The Irish may kick the bankers and the EU to the curb in coming elections, that's a little nerve racking because I am not sure what that means for PM markets.

Like Obama says, "the rules have changed." Indeed.

If nothing fundamentally changes, I am going to double my asset allocation of gold as it moves away and trends down. Do not play with the rent money. Do not play if you will need this money in the next 12 months. I do not trade paper. I have a 5 year horizon. I still believe the upside potential is dramatic and the downside risk is very limited. In fact, I am glad they are having this little pre-season sale before the summer driving season kicks in. Very nice. It is always prudent to wait until the patient is dead before you begin rendering eulogies.